Question 1: Assume that the following conditions exist for a perfectly competitive firm:
price = $10, current output = 100 units/hour, ATC at current output = $9.00, AVC at current output = $8.00 and MC at current output = $8.00.
a. Is the firm earning any economic profit currently? How much is its profit or loss?
b. Is the firm maximizing its economic profit? How do you know? What should the firm do to maximize profit? Should it increase or decrease output?
c. Given your answers in part b, how will the market adjust to reach long-run equilibrium? What will happen to the economic profit in the long-run? Include appropriate graphs for the market and the typical firm in your explanation.
Question 2
a. Carefully draw a graph showing cost and revenue curves for a monopoly. Be sure to label the curves and axes. Because you'll have several things to do on this graph, draw a large scale graph.
b. On your graph, show what price the monopolist will charge and what quantity it will produce in order to maximize profit.
c. Shade (or describe carefully) the boundaries of the economic profit for the monopolist and shade (or describe carefully) the location of the deadweight loss that occurs with monopoly.
d. Assume your monopoly is broken into hundreds of competing small firms under conditions of perfect competition. Using your monopoly graph, show what price and quantity equilibrium under perfect competition. What does this tell us above the impact of a monopoly?
Question 3:
Economists worry quite a bit about efficiency in market types.
a. How does an economist define allocative efficiency? What types of markets exhibit allocative efficiency?
b. How does an economist define economic or productive efficiency? What types of markets exhibit economic efficiency?
c. Provide a graph of a monopolistically competitive firm and identify the excess capacity on the graph.